A government watchdog has issued a warning about the risk for fraud when doctors buy an ownership interest in a medical device distributor and then share in its profits from sales to hospitals.

In a report on Tuesday, the Office of Inspector General said its longstanding guidance "makes clear that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute illegal remuneration under the anti-kickback statute."

The regulator was addressing physician owned distributors, or PODs, which are most commonly used in orthopedics.

"The anti-kickback statute is violated if even one purpose of the remuneration is to induce such referrals" by healthcare professionals in PODs, the report said.

The language in the report "can't get any more damning," said Cowen & Co analyst Dr. Josh Jennings."

The government report will discourage hospitals to use PODs, even if they save money, and probably keep physicians from joining PODs even if they can make more money by doing so, he added.

There had been some attempts to expand PODs into the joint reconstruction area and even cardiac devices, but this report will probably stall those efforts, Jennings said.

In a research note, Wells Fargo said it believed the OIG was taking a critical view of the POD business model and that any curtailment of PODs would be a positive development for Medtronic Inc, Johnson & Johnson, Nuvasive Inc and other large manufacturers of spinal devices.